Price Controls and Market Effects Review Questions

Supply, Demand, and Government Policies 1. Price controls are : usually enacted when policymakers believe that the market price of a good or service is unfair to buyers or sellers. 2. A legal maximum price at which a good can be sold is a price: a ceiling. 3. A price floor : is a legal minimum on the price at which a good can be sold. 4. A price ceiling will only be binding if it is set : below equilibrium price. 5. A binding price ceiling causes : a shortage, which cannot be eliminated through market adjustment. 6. A price ceiling that is not binding will : have no effect on the market price. 7. Binding price ceilings in a market cause quantity demanded to be : greater than quantity supplied. 8. Refer to Figure 6-1. A binding price ceiling is shown in : panel (b). 9. Refer to Figure 6-1. In which panel(s) in the figure shown would there be a shortage for CDs at the ceiling price? : panel (b) 10. With a binding price floor the market price will : be lower than the price floor. 11. A binding price floor in a market sets price : above equilibrium price and causes a surplus. 12. A price floor is not binding if : the price floor is lower than the equilibrium market price. 13. If a price ceiling is a binding constraint, the : actual price will equal the price ceiling. 14. When binding price ceilings are imposed in a market : price no longer serves as a rationing device. 15. When binding price ceilings are imposed to benefit buyers : some buyers will not be able to buy any of the product. 16. A binding price ceiling will make it necessary to : develop a way of rationing the product, because there will be a shortage. 17. In the housing market, rent controls cause quantity supplied to : fall and quantity to rise. 18. If the minimum wage is above the equilibrium wage, : the quantity demanded of labor will be less than the quantity supplied. 19. A minimum wage imposed above a market's equilibrium wage will result in the quantity : supplied of labor being greater than the quantity demanded of labor and unemployment will occur. 20. A newly imposed minimum wage set above the equilibrium wage in a labor market will : cause some workers to get a raise and some workers to lose their job. 21. Workers with high skills and much experience are not affected by the minimum wage because : their equilibrium wages are well above the minimum wage. 22. The initial effect of a tax on the buyers of a good is on : the demand for that good. 23. If tax is imposed on the buyer of a product the demand curve would shift: downward by the amount of the tax. 24. A tax placed on kite buyers will shift : demand downward, causing both equilibrium price and quantity to fall. 25. Assume that the demand and supply curves for cars are elastic. If the government imposed a $500 tax on the buyer of each car, we can assume that the : equilibrium price of a car would decrease by less than $500. 26. Refer to Figure 6-8. The equilibrium price in the market before the tax is imposed is : $6.00. 27. Refer to Figure 6-8. The price buyers will pay after the tax is imposed is: $8.00. 28. Refer to Figure 6-8. The price sellers receive after the tax is imposed is : $5.00. 29. Refer to Figure 6-8. The amount of the tax imposed in this market is : $3.00. 30. Refer to Figure 6-8. The amount of the tax that buyers would pay would be : $2.00. 31. Refer to Figure 6-8. The amount of the tax that sellers would pay would be : $1.00. 32. If buyers are required to pay a $0.10 tax per bag on Hershey's kisses, the demand for kisses will shift : down by $0.10 per bag. 33. A tax on the buyer of tea will cause the price the buyer pays : to rise and the price the seller receives to fall. 34. Which is the most correct statement about the burden of a tax imposed on buyers of sugar? : Buyers and sellers share the burden of the tax. 35. Anytime a tax is placed on the buyers of a product it will : increase the equilibrium price and reduce the equilibrium quantity of that product. 36. A tax placed on the seller of a good : raises the price buyers pay and lowers the price sellers receive. 37. A tax on the seller of cell phones will : reduce the size of the cell phone market 38. A tax on the sellers of tires will : increase the equilibrium price of tires, and reduce the equilibrium quantity. 39. A tax on the sellers of jewelry will cause the price the buyers pay : to rise, and the effective price the sellers receive to fall. 40. A tax placed on the seller of blueberries : increases costs, lowers profit and shifts supply to the left (upward). 41. 53. A $2.00 tax placed on the sellers of mailboxes will shift the supply curve : left (upward) by exactly $2.00. 42. In the end, tax incidence : depends on the forces of supply and demand. 43. If tax is imposed on a market with inelastic demand and elastic supply, : buyers will bear most of the burden of the tax. 44. Buyers of a product will pay the majority of a tax placed on a product when : supply is more elastic than demand. 45. If a tax is imposed on a market with elastic demand and inelastic supply, : sellers will bear most of the burden of the tax 46. Which of the following is the most correct statement about tax burdens? : A tax burden falls most heavily on the side of the market that is more inelastic. 47. Suppose that a tax is placed on DVDs. If the seller ends up paying the majority of the tax we know that the : supply curve is more inelastic than the demand curve. 48. Suppose that a tax is placed on books. If the buyer pays the majority of the tax we know that the : demand curve is more inelastic than the supply curve. Chapter 4: Elasticity 1. In general, elasticity is : a measure of how much buyers and sellers respond to changes in market conditions. 2. If good is a necessity, demand for the good would tend to be : inelastic 3. If good is a luxury, demand for the good would tend to be: elastic. 4. The elasticity of demand for luxuries tends to be : greater than 1 5. If a person only occasionally enjoys a cup of coffee, his demand for coffee would be horizontal. : it is elastic. 6. A person who has high cholesterol and must exercise an hour every day has what type of demand for exercise equipment? It is inelastic 7. Werther’s candy tends to have an elastic demand because there are many close substitutes for Werthers. 8. There are very few, if any, good substitutes for motor oil. Therefore, : the demand for motor oil would tend to be price inelastic. 9. Holding all other forces constant, when the price of gasoline rises, the number of gallons of gasoline demanded would fall substantially over a ten-year period because : buyers tend to be much more sensitive to a change in price when given more time to react. 10. A good will have a more inelastic demand : if it is considered a necessity 11. When the price of bubble gum is $0.50, the quantity demanded is 400 packs per day. When the price falls to $0.40, the quantity demanded increases to 600. Given this information and using the midpoint method, you know that the demand for bubble gum is : Elastic 12. The midpoint method is used to compute elasticity because it : gives the same answer regardless of the direction of change. 13. Suppose there is a 6 percent increase in the price of good X and a resulting 6 percent decrease in the quantity of X demanded. Price elasticity of demand for X is :1. 14. Suppose the price of Twinkies is reduced from $1.45 to $1.25 and, as a result, the quantity of Twinkies demanded increases from 2,000 to 2,200. Using the midpoint method, the price elasticity of demand for Twinkies in the given price range is : 64. Do the math 15. If the price elasticity of demand for a good is 4.0, then a 10 percent increase in price would result in a : 40 percent decrease in the quantity demanded. Chapter 5: Welfare, Externalities and Public goods 1. Welfare economics is the study of : how the allocation of resources affects economic well-being. 2. With respect to welfare economics, the equilibrium price of a product is considered to be the best price because it : maximizes the total welfare of buyers and sellers. 3. The equilibrium of supply and demand in a market : maximizes the total benefits received by buyers and sellers. 4. Willingness to pay measures the : maximum amount that a buyer will pay for a good. 5.Consumer surplus is : a buyer's willingness to pay minus the price. 6. If a consumer is willing and able to pay $15.00 for a particular good but the price of the good is $17.00, then the : consumer would not purchase the good and would not have any consumer surplus. Externalities: Positive externality- Benefit enjoyed by individuals even though they did not pay to receive. Example; Neighbours buy a tree and it provides shade for you, even though you did not buy or contribute for the tree Negative externality- A cost suffered by individuals for which they are not compensated for. Example; your neighbour buys a dog, and it barks loud at night keeping you awake. Marginal Private Benefit- The maximum price someone would pay to consume one more unit of the good Marginal Private Cost- Addition to the firm’s total cost to produce one more of the good In the competitive equilibrium market, MPB=MPC and the market outcome is efficient Coase Theorem: If the bargaining costs are small and property rights are well-defined, then the individual parties may be able to settle/ come to a solution on their own Public Goods: Free rider- Someone who enjoys the benefit of a good but does not pay for it. Example; fireworks show as someone watches over a fence for free Public good- Good or service provided by the government for the society to consume for free of charge Public goods: Non-excludable and non-rival Private goods: Excludable and rival Common goods: non-excludable and rival Club goods: excludable and non-rival Tragedy of the Commons: Misuse or overuse of common property by individuals acting in their own best interest while ignoring the interests of the collective. Chapter 7: Production Costs 1.Economists normally assume that the goal of a firm is to : 1. make profit as large as possible even if it means reducing output 2. make profit as large as possible even if it means incurring a higher total cost 2. Total revenue equals : total output multiplied by price per unit of output. 3. XYZ corporation produced 300 units of output but sold only 275 of the units it produced. The average cost of production for each unit of output produced was $100. Each of the 275 units sold was sold for a price of $95. Total revenue for the XYZ corporation would be : $26,125. 4. Which of the following would be categorized as an implicit cost? : 1. wages of workers 2. raw material costs 3. forgone investment opportunities 5. An example of an explicit cost of production would be : the cost of flour for a baker. 6. Which of the following is an implicit cost? : the owner of a firm forgoing an opportunity to earn a large salary working for a Wall Street brokerage firm 7. An example of an implicit cost of production would be : the income an entrepreneur could have earned working for someone else. 8. John owns a shoe-shine business. His accountant most likely includes which of the following costs on his financial statements? : the cost of shoe polish Scenario 13-1 Joe wants to start his own business. The business he wants to start will require that he purchase a factory that costs $300,000. To finance this purchase, he will use $100,000 of his own money, on which he has been earning 10 percent interest. In addition, he will borrow $200,000, and he will pay 12 percent interest on that loan. 9. Refer to Scenario 13-1. For the first year of operation, what is the explicit cost of purchasing the factory? : $24,000 d. $44,000 10. Refer to Scenario 13-1. For the first year of operation, what is the opportunity cost of purchasing the factory? : $34,000 11.Economic profit : will never exceed accounting profit. 12. The marginal product of labour is equal to the : increase in output obtained from a one unit increase in labour. 13. One would expect to observe diminishing marginal product of labour when : crowded office space reduces the productivity of new workers. 14. Which of the following statements about a production function is correct for a firm that uses labour to produce output? : The production function depicts the relationship between the quantity of labour and the quantity of output. 15. One assumption that distinguishes short-run cost analysis from long-run cost analysis for a profit- maximizing firm is that in the short run, : the size of the factory is fixed. 16. Average total cost tells us the : cost of a typical unit of output, if total cost is divided evenly over all the units produced. 17. Marginal cost tells us the : amount by which total cost rises when output is increased by one unit. 18.If marginal cost is rising, : marginal product must be falling. 19. Average total cost is very high when a small amount of output is produced because : average fixed cost is high. 20. Total cost necessarily rises due to 21.The efficient scale of the firm is the quantity of output that : minimizes average total cost. 22. When marginal cost is less than average total cost, : average total cost is falling. 23. When marginal cost exceeds average total cost, : average total cost must be rising. 24. Average total cost is increasing whenever : marginal cost is greater than average total cost. 25. Marginal cost is equal to average total cost when : average total cost is at its minimum. 26. The marginal cost curve crosses the average total cost curve at : 1. the efficient scale 2. the minimum point on the average total cost curve 3. a point where the marginal cost curve is rising. 27. Adrian's Premium Boxing Service subcontracts with a chocolate manufacturer to box premium chocolates for their mail order catalogue business. She rents a small room for $150 a week in the downtown business district that serves as her factory. She can hire workers for $275 a week. Chapter 8: perfect competition 1. A market is competitive if : a firms have the flexibility to price their own product and each seller is small compared to the market. 2. For a firm in a perfectly competitive market, the price of the good is always : equal to marginal revenue. 3. If a firm in a perfectly competitive market triples the number of units of output sold, then total revenue will : exactly triple. 4. Which of the following is NOT a characteristic of a perfectly competitive market? : Firms have difficulty entering the market. 5. Which of the following statements best reflects a price-taking firm? : If the firm were to charge more than the going price, it would sell none of its goods, The firm has no incentive to charge less than the going price, The firm can sell as much as it wants to sell at the going price. 6. Of the following characteristics of competitive markets, which are necessary for firms to be price takers? : There are many sellers, Goods offered for sale are largely the same. 7.When a firm in a competitive market produces 10 units of output, it has a marginal revenue of $8.00. What would be the firm's total revenue when it produces 6 units of output? : $48.00 8. For a competitive firm, : average revenue, marginal revenue, and the price of the good are all equal to one another. 9. The Wheeler Wheat Farm sells wheat to a grain broker in Seattle, Washington. Since the market for wheat is generally considered to be competitive, the Wheeler Wheat Farm maximizes its profit by choosing : the quantity at which market price is equal to the farm's marginal cost of production. 10. Comparison of marginal revenue to marginal cost : reveals the contribution of the last unit of production to total profit, is helpful in making profit-maximizing production decisions. 11. If marginal cost exceeds marginal revenue, the firm : may still be earning a profit. 12. When marginal revenue equals marginal cost, the firm : may be minimizing its losses, rather than maximizing its profit. 13. Which of the following statements best reflects the production decision of a profit-maximizing firm in a competitive market when price falls below the minimum of average variable cost? : The firm will immediately stop production to minimize its losses. 14. When a profit-maximizing firm in a competitive market is unable to generate enough revenue to pay all of its fixed costs it should, in the short run, : continue to produce as long as total revenue is sufficient to pay variable costs. 15. For any given price, a firm in a competitive market will maximize profit by selecting the level of output at which price intersects the : marginal cost curve. 16. Which of the following statements is correct regarding a firm's decision making? : The decision to shut down is a short-run decision, whereas the decision to exit is a long-run decision. 17. A firm's marginal cost has a minimum value of $2; its average variable cost has a minimum value of $4; and its average total cost has a minimum value of $5. Then the firm will shut down if the price of its product falls below : $4 18. A competitive market is in long-run equilibrium. If demand decreases, we can be certain that price will : fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise. 19. If all existing firms and all potential firms have the same cost curves, there are no inputs in limited quantities, and the market is characterized by free entry and exit, then the long-run : supply curve for the market is horizontal and equal to the minimum of longrun average cost for each firm. 20. When entry and exit behaviour of firms in an industry does not affect a firm's cost structure, : the long-run market supply curve must be horizontal. 21. Refer to Figure 14-9. When the market is in long-run equilibrium at point A in panel (b), the firm represented in panel (a) will : have a zero economic profit. 22. Refer to Figure 14-9. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from Demand0 to Demand1 will result in : an eventual increase in the number of firms in the market and a new long-run equilibrium at point C. 23. Refer to Figure 14-9. If the market starts in equilibrium at point C in panel (b), a decrease in demand will ultimately lead to : fewer firms in the market. 24. Refer to Figure 14-9. When a firm in a competitive market, like the one depicted in panel (a), observes market price rising from P1 to P2, it is most likely the result of : the exit of existing firms in the market. 25. Refer to Figure 14-9. An increase in market supply from Supply0 to Supply1 is most likely the result of : the entrance of new firms in the market. d. All of the above are correct. 26. Regardless of the cost structure of firms in a competitive market, in the long run : the marginal firm will earn zero economic profit. 27. A market might have a upward-sloping long-run curve if : the firms have different costs. 28. When new entrants to a competitive market have higher costs than existing firms, : market price must be rising. 29. In a particular market, there are 500 firms. Each firm has a marginal cost of $30 when it produces 200 units of output. One point on the market supply curve is : (Quantity = 100,000, Price = $30). 30. There are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and all of them have the following cost structure : The long-run supply curve for this market is horizontal at a price of $5.